The Wrap: Retail, A-REITs, Building & Banks

Weekly Reports | Feb 01 2019

Weekly Broker Wrap: Specialist platforms; consumer stocks; online retail; A-REITs; building materials; and banks.

-Platform fees unlikely to suffer from material price compression: CLSA
-Retail weakness heralds slowdown in consumer spending
-Shoppers flag Amazon as major destination for electronics
-Settlement risks increase for multi-residential apartments
-Building materials stocks becoming attractive
-Ord Minnett advises patience required for banking sector stocks


By Eva Brocklehurst

Specialist Platforms

CLSA believes specialist platform providers are already very competitive on price, with both Netwealth ((NWL)) and HUB24 ((HUB)) wholesale rates more than -30% below rack rates, and broadly in line with rates charged by Panorama and MLC.

The broker's analysis suggests platform fees are unlikely to suffer from material price compression over the medium term. Revenue margins are expected to contract at a moderate rate over the longer term, resulting in an -11 basis points decline by FY26.

Weak market returns throughout the December quarter were the major driver of balances in funds under administration (FUA) that were below expectations. HUB24, which reported second quarter FUA of $10bn, ahead of expectations, outperformed the market because of a large client transition and its second highest inflows on record.

CLSA has Buy ratings for Praemium ((PPS)), Onevue Holdings ((OVH)) and HUB24 and upgrades Netwealth to Buy, believing recent weakness is a short-term trading opportunity.

Consumer Stocks

A number of companies across the retail sector have flagged weaker conditions and while some downgrades over recent months have been company specific, UBS suggests the breadth of the weakness is an indicator that consumer spending is slowing down.

Weakness has been led by discretionary goods while trends in non-discretionary items such as groceries remains solid. In analysing sensitivities to consumption and other macro factors, UBS finds that gaming, discretionary retail and media are most positively correlated to overall consumption. Other discretionary and discretionary retail are also noticeably correlated with house prices.

The broker believes travel, renovations, white goods and car sales are most vulnerable and is underweight discretionary retail because of valuations and relative earnings risk. That said, some retailers have reported reasonable conditions over the Christmas period, such as Noni B ((NBL)), The Reject Shop ((TRS)) and Kogan ((KGN)).

Macquarie reviews the new lease accounting standards which are in effect this month for those stocks with December balance dates. The standard aims to reflect the financial commitment of an operating lease on the balance sheet.

Simply stated, the present value of lease commitments becomes a liability on the balance sheet and Macquarie believes the new standard is not good for Woolworths ((WOW)) or Myer ((MYR)), given longer leases of 11.1 and 11.0 years respectively.

The broker suggests the pre-tax profit of Woolworths could decline, given the new interest and depreciation charge may outweigh the adding back of cash rent expenses. Moreover, as evidenced by the previous Caltex ((CTX)) result, value adding strategies such a sale and leasing back of existing sites may now look less attractive.

Online Retail

Online retail sales rose around 11% in the 12 months to November 2018, which UBS calculates outpaced total retail growth by a factor of over 3x. Online now encapsulates around 9.0% of total retail, having accelerated post the launch of Amazon.

Moreover, the analysis shows domestic online retailing is outperforming international, a function of a lower Australian dollar, the removal of the GST-free threshold and buy now/pay later options. The category most at risk to online retailing are electronics, personal care and accessories. The broker believes online take-up will be driven by consumers obtaining what they want, when they need it and a good price.

Shoppers have also flagged Amazon is a major shopping destination for electronics. While cautious, UBS believes these issues are priced into retail stocks and prefers those with limited exposure to Amazon such as Woolworths, Metcash ((MTS)) and Treasury Wine Estate ((TWE)) as well as those with attractive valuations such as Super Retail ((SUL)) and Adairs ((ADH)).

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